Forecast plus what’s driving mortgage rates today

Average mortgage rates just inched lower yesterday. Yes, stocks closed down 3% and 10-year Treasury yields dipped below 0.9% for the first time ever. But those mortgage rates have become untethered from other markets: They may travel in the same direction but recently they’ve moved nothing like as quickly. Still, they remain at or very near all-time lows.

First thing this morning, markets looked set for another day of mayhem, perhaps similar to or even worse than yesterday’s. Overnight, the number of confirmed Covid-19 coronavirus cases breached 100,000 globally for the first time. Even better-than-expected employment numbers seemed unable to slow the downward momentum.

So we think that mortgage rates today might fall again. But this sort of volatility presents risks of sharp movements over brief periods. And, as always, events may overtake that prediction.

Market data affecting today’s mortgage rates

First thing this morning, markets looked set to deliver mortgage rates today that are lower. By approaching 10 a.m. (ET), the data, compared with roughly the same time yesterday morning, were:

• Major stock indexes were all appreciably lower. (Good for mortgage rates.) When investors are buying shares they’re often selling bonds, which pushes prices of Treasurys down and increases yields and mortgage rates. The opposite happens when indexes are lower
• Gold prices rose to $1,685 an ounce from $1,659. (Good for mortgage rates*.) In general, it’s better for rates when gold rises, and worse when gold falls. Gold tends to rise when investors worry about the economy. And worried investors tend to push rates lower
• Oil prices moved lower to $43.36 a barrel from $46.57 (Good for mortgage rates* because energy prices play a large role in creating inflation and also point to future economic activity.) 
• The yield on 10-year Treasurys fell to 0.70% from 0.93%. A year ago, it was at 2.69%. (Good for mortgage rates.) More than any other market, mortgage rates tend to follow these particular Treasury bond yields
•  CNN Business Fear & Greed index fell to 6 from 11 out of a possible 100 points. (Good for mortgage rates.) “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So lower readings are better than higher ones

Today might be a better day for mortgage rates. But the gap between those rates and other markets mean sharp falls are less likely — or at least less reliable. And, with such excitable investors, nothing’s certain.

This week

Virus still the biggest factor for mortgage rates

The Wuhan coronavirus (Covid-19, standing for Coronavirus disease 2019) was certainly behind the chaos seen in global markets since Feb. 20. The virus now has a confirmed presence on five continents and in 95 countries, up from 87 yesterday. Here at home, the US has 233 cases, up from 162 yesterday.

China, South Korea, Japan (including the cruise ship harbored in Yokohama, Japan), Italy and Iran each has infections in the thousands. And 13 other countries have them in the hundreds. China, Japan and Italy each ranks among the world’s top-10 economies, while South Korea occupies the No. 11 slot.

While markets are made up of people who share the fear and empathy of the rest of humanity, their focus isn’t directly on Covid-19’s health implications. Their concern is the virus’s economic consequences, which are a byproduct of the medical ones.

Worldwide worries

Data suggest those economic consequences are likely to turn out to be severe. This morning, a poll by Reuters of economists based in China found:

The coronavirus likely halved China’s economic growth in the current quarter compared with the previous three months, more severe than thought just three weeks ago and triggering expectations for earlier interest rate cuts

And, already, several other governments and central banks are forecasting reduced gross domestic product (GDP) growth for their economies. Indeed, on Monday, the Organization for Economic Cooperation and Development (OECD) slashed its 2020 global growth forecasts to 1.5%, almost half the 2.9% it was expecting before Covid-19 took hold. It also warned that the virus could “plunge several countries into recession this year,” according to The Guardian.

The dangers of global connectedness

Globalization has brought much more sophisticated and diverse supply chains. So, for instance, if you want to build a car in America, you’ll likely rely on parts from several other nations. And that means you’ll be vulnerable to any disruption in those other countries.

As long ago as Feb. 4, Bloomberg noted:

China is the largest exporter of intermediate manufactured goods that can be resold between industries or used to produce other things, so its problems quickly reverberate through global supply chains. Indeed, global reliance on those products doubled to 20% from 2005 to 2015.

But it’s not just China. If global reliance on it for intermediate goods is 20%, the rest of the world accounts for 80%. Reinforcing that point, on Feb. 24, The Wall Street Journal carried the headline, “World Economy Shudders as Coronavirus Threatens Global Supply Chains.”

Central banks face problems

Traditionally, central banks intervene during troubled times to prop up their economies. And it seems certain most important ones will in response to Covid-19. The Bank of Japan, European Central Bank (ECB) and Bank of England have all signaled a willingness to act, presumably with rate cuts, in recent days.

But when the Federal Reserve did so on Tuesday morning, markets responded badly to a shock, half-point cut in interest rates. They seemed to suspect that it was acting precipitously. Was it bending to political pressure from the White House or was it overreacting to stock market falls? More scarily yet, did it know things that investors didn’t?

That suggests central banks will have to tread warily when intervening. But few of them have much room to maneuver anyway. They already have exceptionally low rates (the ECB’s is currently -0.5% — yes, a negative rate) so are limited in their use of that traditional stimulus tool. And quantitative easing (sometimes compared to printing money) brings its own dangers.

Some economists have been warning for years about the dangers of keeping interest rates artificially low during times of good economic growth. They feared that would limit options when the next recession loomed. We may be about to discover whether they were right. And, if so, the extent to which their fears were justified.

Underestimating the economic harm

Similarly worryingly, there are signs that economists and analysts have been underestimating the virus’s likely economic impacts. Last Saturday, China’s official purchasing managers’ index (PMI), which is an important indicator of economic activity, came in at 35.7 index points for February.

But analysts polled by Reuters had expected it to be 46.0, down from 50 in January. February’s actual figure was a record low for modern China, and more granular figures within the index painted an even grimmer picture for manufacturing production and new orders.

Arguably, the single thing investors fear most is uncertainty. And if they can’t rely on analysts and economists to provide them with realistic assessments of what’s happening, their urge to put their money into safe havens is likely to be unnecessarily intense.

Covid-19 likely to spread within US

The Centers for Disease Control and Prevention (CDC) warned last Tuesday that the coronavirus would probably spread within American communities. Dr. Nancy Messonnier, director of the National Center for Immunization and Respiratory Diseases, told journalists:

It’s not so much of a question of if this will happen anymore but rather more of a question of exactly when this will happen. … We are asking the American public to prepare for the expectation that this might be bad. … Disruption to everyday life might be severe.

The following day, in a news conference, President Donald Trump provided a more upbeat take on the danger posed. “We’re very, very ready for this,” he said, adding that the risk to the US was “very low” and that he expected the outbreak to end swiftly. He announced that Vice President Mike Pence will lead the administration’s response.

How scary are the health implications?

Overnight figures show Covid-19 has been confirmed in 100,696 (up from 96,902 yesterday) cases around the world, and has killed 3,412 (up from yesterday’s 3,308). Yes, those figures — assuming they’re accurate — show it to be way more infectious than others, such as SARS and MERS. But they also reveal a much lower death rate (3.4%) so far among those infected than that of either SARS (nearly 10%) or MERS (35%).

And that crude death rate calculation is almost certainly too high. Some experts are predicting a final mortality rate of around 1%. But it’s too soon to make definitive judgments.

Mortgage rate volatility ahead?

In coming days and weeks, volatility will likely be driven by changing news cycles. Good news about the virus (and consequently its economic effects) should normally see mortgage rates rise while bad news typically pushes them down. But such news isn’t always reliable.

Scientists are still trying to reach a consensus over many medical aspects of the virus. And governments are increasingly trying to craft narratives that head off panic over both the health and economic consequences of the epidemic. And not all of them are scrupulous about avoiding fake news. For example, some remain suspicious of China’s and Iran’s numbers.

So markets that bend with every passing news cycle may turn out to be “lively,” to say the least. Still, our recent warning that “mortgage rates could bounce up and down like Tigger on E” has so far turned out to be wrong, at least until this week. But it’s too soon to rule out the Tigger scenario in the future.

Economic reports this week

Last week, some quite important economic reports were effectively ignored by markets as the coronavirus monopolized their attention. The same has happened this week, although Super Tuesday likely had an impact.

Today’s official, monthly employment situation report was the most important report this week. And the number of new jobs was higher than forecast. But they weren’t good enough to distract investors.

Of course, more normally, any economic report can move markets, as long as it contains news that’s shockingly good or devastatingly bad — providing that news is unexpected.

Forecasts matter

That’s because markets tend to price in analysts’ consensus forecasts (below, we use those reported by MarketWatch) in advance of the publication of reports. So it’s usually the difference between the actual reported numbers and the forecast that has the greatest effect.

And that means even an extreme difference between actuals for the previous reporting period and this one can have little immediate impact, providing that difference is expected and has been factored in ahead.

Although there are exceptions, you can usually expect downward pressure on mortgage rates from worse-than-expected figures and upward on better ones. However, for most reports, much of the time, that pressure may be imperceptible or barely perceptible.

This week’s calendar

This week’s calendar for economic reports comprises:

• Monday: ISM manufacturing index (actual 50.1%; forecast 50.5%) for February, and January’s construction spending (actual +1.8%%; forecast +0.9%)
• Tuesday: Nothing. But motor vehicle sales for February will emerge during the day (forecast 16.8 million vehicles)
• Wednesday: February ISM nonmanufacturing index (actual 57.3%; forecast 54.8%) and ADP employment report (actual 183,000 new private-sector jobs; no forecast but 291,000 in January)
• Thursday: Quarter 4 of 2019 productivity (actual +1.2%; forecast +1.3%) and unit labor costs (actual +0.9%; forecast +1.3%) Plus January factory orders (actual –0.5%; forecast -0.2%)
• Friday: February employment situation report, including nonfarm payrolls (actual 273,000 new jobs; forecast 165,000), unemployment rate (actual 3.5%; forecast 3.5%) and average hourly earnings (actual +0.3%; forecast +0.3%). Plus January’s trade deficit (actual -$45.3 billion; forecast -$45.9 billion)

As it turned out, none of these reports was sufficiently great or awful to cut through markets’ viral obsession.